Nike and Under Armour are facing unexpected headwinds — and the battle could get even worse

There are several signs that the brands that have been long-hailed has invincible to the challenges in the retail sphere may be headed for trouble.

Nike, a $32.4 billion behemoth, faced what Morgan Stanley called "headwinds [that] are strengthening" its most recent quarter.

The company was saddled with a few core problems, namely excess inventory.

The company acknowledged that ridding itself of excess inventory had a negative impact on the company's results, causing gross margins to decline.

"As we go into the next quarter we expect clearly to remain in excess inventory through our factory stores and also through select third party value channels," Nike president Trevor Edwards said on a recent earnings call.

But the company is able to hide behind all of that with impressive revenue growth and a beloved brand.

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In fact, he defended the inventory, in part, by explaining how the company constantly brought in new products. Constant innovation, after all, is a hallmark of Nike's branding — from moisture-adapting apparel to self-lacing sneakers.

Under Armour.
Facebook/Under Armour

Recently, Under Armour posted a dip in profits, hiding behind revenue growth (it was the twenty-fifth quarter of sales that were up by 20% or more — this quarter, it was up 28%).

Like Nike, the company was able to hide behind growth on some ends and a strong, beloved brand and the promise of continual expansion. The company also has managed to foster an evangelical spirit, and it's opening up a new store where FAO Schwarz used to call home — one that will reportedly combine 'experiences' with traditional shopping. It's also going to be putting its apparel in Kohl's stores early next year to help "minimize further revenue disruption" as UBS analyst Michael Binetti wrote, one day before the company's official announcement.

"Some of the profit dip is attributable to weaker margins which are a function of shifts in the product mix. This is arguably more of a long term challenge and one that is exacerbated by the strong dollar which has negatively impacted gains from the international business. Given the importance of overseas expansion to Under Armour, this will likely continue to put downward pressure on profits during this year," Håkon Helgesen, analyst at consulting firm Conlumino, wrote in a note to clients.

"Despite its bottom line challenges, Under Armour still has good growth potential across both its international and domestic businesses," he wrote.

Under Armour, which is very small compared to Nike, may be at a crucial fork at this juncture in time.

"Can we see corresponding margin lift with that top line growth or will they continue to have to invest behind innovation, market building teams as they go into new countries, etc?" Betty Chen, Managing Director of Mizuho Securities, asked rhetorically. "And I think [those are] some of the unanswered questions right now."

Nike.
Facebook/Under Armour

There are concerning trends in the activewear industry as a whole.

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Recently, UBS also noted that the sportswear season has been faltering as a whole, calling the second quarter of fiscal 2016 "among the toughest quarters ever for US athletic retailing," highlighting surplus inventory following the 2015 holiday season.

UBS also highlighted Sports Authority's bankruptcy from earlier this year as another cause for the recent struggles. Under Armour also openly addressed it on a quarterly earnings call, saying that its 39% decrease in operating income was primarily related to Sports Authority liquidating.

"They're both fighting the wholesale channel to be resilient," Chen told Business Insider.

But still, millennial experts and analysts are quick to write about how these brands have managed to capture young consumers because they sell more than just clothes: they frequently come equipped with experiences (like run clubs and the aforementioned new superstore) and sell the prospect of community.

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And it helps that activewear is one of the only categories that consumers will willingly pay full price for, especially given the increasing important of health to most consumers. As a result, more and more smaller athletic wear brands have popped up, from Outdoor Voices to Yogasmoga. All these up-and-comers are small compared to these main players.

And there's still a reason that Under Armour, Nike, and even Lululemon (which, interestingly, has an inventory issue, too) rule the athleisure scene.

"We really do believe companies more like Lulu and Nike and Under Armour will have an edge because they have the ability to attract both types of consumers — the casual athleisure customer or activewear customer who occasionally works out but mostly wants to wear this for casual weekend wear, running errands, et cetera," Chen said. "[Or] if you are then a true workout fanatic ,and you really want activewear that will support you enhance your performance or make you more comfortable when you're working out, but also tends to be a little bit more flattering."

Chen pointed out that competitors like Puma — which employ ambassadors like Rihanna and Kylie Jenner — attract a more fashion-oriented and less perform ace-oriented crowd.

And in a time that most retailers are crashing, revenue growth and positive comparable sales are always better than nothing.